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Karl J. Smith writes "Rivest has solved the micropayments problem with encryption and statistics. You throw away some transactions so that you don't have to pay bank fees, and process the rest. Hiawatha Bray has written an article and Rivest's new company is PepperCoin."

I attended a presentation given by Rivest on this scheme a few months ago. I'm convinced it will work.

BUT, not anytime soon, and you've identified the exact reason why: peppercoin patent monopoly. No reasonable merchant nor consumer should bet on a scheme that locks you into one vendor, especially for something as vital as your very revenue source. We like money because it is 100% transferable -- I can get it from anyone willing to trade with me. Credit cards are also competitive -- if I don't like Visa, I can try AmEx or Discover or MasterCard, and most vendor's have a single machine that can take any of the above. If I don't like peppercoin, there's no alternative I can switch out for -- the system is closed, patented, and sealed. Sure, there are other micropayment schemes that have lived and died, but if I wanted to start a peppercoin-compatible service, tough luck; it'll be at least 17 years before we get a legal shot at that.

If Rivest were to use an intelligent license, a patent wouldn't pose all the large of a hurdle. Rivest could allow anyone to use the patent for free in perpetuity, except when they translate the payments into cash. All fees could be collected at banks. If Rivest guarantees the fees will never exceed a certain amount (such as the current fees on Visa cards), there should be no reason for the patent to get in the way.

It is a neat idea, but what does it do that a prepayment card does not? Think beenz.com or similar. This also pays in bulk - the customers pay for the web currency and beenz pay the merchant for all purchases in one lump sum, so fees are not an issue.

After researching past failed efforts for a business plan competition, I came to the conclusion that the problem with Micropayments has never been the technology or payment method behind them. There have actually been multiple plans that did just fine in those areas.

The failure is summed in one word, MOMENTUM. Micropayment companies can't get any because they usually sign up one or two bigger names (those sites have to have *really* compelling content for anyone to sign up), people go elsewhere when they see their favorite little diversion now requires payment, and the micropayment start-up runs out of money before they get momentum. In addition to that, people prefer subscriptions to micropayments.

I do think there is a way to solve the problem, but Peppercoin doesn't seem to be it.

Difference is that peppercoin don't require the customer to join anything or prepay.

The customer thinks they're using their credit card in the normal way: just most of the time, the micro-transaction is discarded, sometimes it becomes a macro-transaction and is pushed through. It should average out.

The killer to this idea is that (if I read the non-technical article correctly) is that the consumer has a 9 in 10 chance of paying 0*x, but DOES have a 1 in 10 chance of 10*x. It seems to me that people may object to this gamble unless you have a pretty thorough user education program. (This bit was unclear in the Boston Globe article, but if you're going to throw transactions out, you need to make that up from somewhere.)

Also (under same may-have-missed-the-point caveat) , it seems that when the ink turns red, the incentive is there to skew the probabilities a bit. Brings a whole 'nuther meaning to "preferred partner".

But I can almost guarantee that I've missed something:

Rivest is a Bright Fellow, and will have come up with these problems and solved them. Anecdotally, when developing RSA, one guy would come up with a system that he thought worked, and the other two would devote their energies to breaking it. Repeat until success. This indicates that Rivest has adopted the competing-evolution model of invention.

zerosignal writes:"Most people's number skills are so poor that they probably won't understanding or trust it."

First, this is not intended as a flame.

But what people accept these days (Microsoft code and our current president come to mind) dwarfs this idea spectacularly. 999 of 1,000 people won't even bother trying to learn how it works much less chafe at its complexity.

And I'm sure that the Peppercoin people aren't going to make you take a test before you use their service. Smiling faces on a brochure go a long way.

Umm...less bookkeeping/charges between merchant and payment authority (of whichever kind). Problem with this is that unless you prepay or have credit with the payment authority, they still have to bill you. A bank could make this a kickass system, but as I have mentioned elsewhere they have little to no interest in cutting revenue from their business customers.

I think if you randomize you will get a chance to fudge some data; I mean, if in the end your average price of item turns out to be like 49.68 cents averaged over long term, you will have a very unlikely chance of noticing this discrepency. especially most (ALL?) financial software rounds to the cent.

At the same time, the above is assuming that EVERYTHING is 50 cents. Now, imaging there are things costing different amounts of money, and calculating if papercoin is ripping you off that 0.3% becomes difficult if not impossible.

Now, of course, I can't quite figure out how does papercoin charges the consumer. That's really weird because THEY can't be hit with the 25c charge everytime either or they will go under; so they will either have to

1) act like a bank / paypal and have you keep a balance.2) wait until your "sum" is large enough and charge it all at once.

both have serious problem.

Of course - this entire thing is really a credit card system problem, that can really only be solved by the credit card companies - but they seem to have no incentive to do so, so... we might be stuck here for a while.

I too think the proposed scheme seems to have some flaws, as described in that article anyway.

If the vendor can know the value of your token, then he can refuse to take ones with no value.What do you do when the vendor says "I'm sorry sir, but there seems to be a problem with your token, are you sure it's not a forged one?". Do you give him a different one?

Also, how are we supposed to know that the ratio of tokens with values is exactly 1/20. It's in peppercoin's favour if only 1/25 have a value. Surely we (or merchants) have to trust them, yet they're financially involved. Why should we trust them to not rip us off?$0.50 for every token would mean no possibility to rip anyone off.

Introducing a third party that someone has to trust means that there are now _6_ trust relations rather than _2_. That's _worse_ than the status quo, IMHO.

Won't catch on. I bet you $10 on that (or maybe $0, you'll find out later).

Not so, the customer is always charged the $0,50 (in this example). It is the shopowner who will get $10 or nothing. If he sells a lot of items, probability dictates that his average take will still be around $0,50 per item.

I suspect that on the customer's end they will solve the micropayment problem by forcing the customer to deposit a minimum amount (say $10) into his Peppercoin account, rather than charging every nickel and dime he spends separately. The customers will not mind if they expect to be able to spend these Peppercoins on many goods and services. Thst is where the chicken&egg problem comes in: if there are only a few sites accepting these coins initially, no one will want to depost the minimum $10 to activate his account.

That still doesn't mean a customer gets a dice-roll to avoid paying. Peppercoin.com will probably aggregate all of a customer's monthly purchases into a single transaction.

That way, they only lose money on the credit-card overhead if a user makes just a few micropayments per month. This is probably a kind of loss-leader behavior to jumpstart the industry. Hopefully, once things get rolling along, no customer will have an incentive to spend $10/month.

(And if that happens, they might decide to push back the billing for another 30 days, to keep costs low.)

But the beauty is that the merch hasn't done a lot of bookkeeping either. Neat!

The merchant still does need to do more detailed bookkeeping in order to keep an eye on the random number generator, so that he can complain loudly in case it's biased to obviously in Peppercoin's favor. Not doing any local accounting would be highly foolish!

The idea that the customer will still be paying only 50 cents (or whatever) is what makes the randomization seem unnecessary. The added cost per transaction is something imposed by the credit card companies. Once you set up an intermediary to take the hit of the multiple transactions there's no true cost anymore. They can charge as much (or as little) as the market will bear for the service they're providing.
This article doesn't do a sufficient job explaining what exactly the problem is that this randomization is supposed to solve.

Looks like anyone who want to use money needs to trust their goverment. Anyone who needs to use plastic-cards to pay with needs to trust their bank. So whats new? You'll be forced to trust someone anyhow.

No they done't - over the long term. All they have to do is keep statistics. Over >1000 transactions, they should be gettting within 1% of their "due" money. They would pretty soon see of Peppercoin was ripping them off and put them out of business by smearing their name. Statistics rule.

True, but if Visa and Mastercard cheat the merchant, it's fairly obvious, and easy to sue.

However, Peppercoin has the power to cheat in a very subtle and unprovable way.

Due to the randomization, no merchant gets his due exactly. Some get more, some get less. Initially, the ones that get less are likely to complain, especially if they get much less. Peppercoin takes note about which of the merchants that got less didn't complain... The next month, those that didn't complain get treated to a slightly lower ratio than the one promised. As it is essentially a random process, it is very hard to prove that any deviation from average is intentional. Especially if you are careful not to overdo it. And as Peppercoin specifically choses those merchants that didn't complain, the probability is quite high that these didn't even notice.

IT professor Ron Rivest has come up with a new way to throw away money on the Internet. With luck, it'll make him a fortune. Rivest is one of the three people who devised the encryption system that allows us to transmit our credit-card information safely over the Internet. The company that grew out of this work, Bedford-based RSA Security Inc., is one of the leaders in the field. He's a fellow of the American Academy of Arts and Sciences and the Association of Computing Machinery. Put it this way: Rivest knows what he's doing. So what's all this about throwing away money?

Actually, it's a fascinating proposal for solving one of the toughest -- and smallest -- problems of Internet commerce. It's easy to buy a $20 CD online, or a $100 hard drive or a $20,000 car. But how do you buy something online when it only costs a buck or two?

This is what's called a micropayment, and it turns out to be remarkably difficult to do. Entrepreneurs have been banging their heads against this problem for the past half-decade or more, and with good reason. There are lots of desirable digital products that might sell like popcorn if there were a practical way to pay for them. Music, for instance. Some subscription services will let you download tunes at 50 cents apiece, but you have to pay a subscription fee as well. We're still waiting for a service that lets anybody drop by at any time, and purchase a single song.

This is because it costs so much to process a single financial transaction. Most Internet shopping happens with a credit card. The merchant selling the goods must pay a transaction fee to the credit card issuer. This usually amounts to a few percent of the sale price, plus a flat fee of 25 cents or so.

But this flat fee is the same no matter the size of the purchase. When the merchant is selling Tom Clancy novels at $30 apiece, the fee doesn't matter. If it's an MP3 of the latest single from Sheryl Crow, that fee will eat up all the seller's profits, maybe even put him in the red.

''You can't do small payments with credit cards,'' said Rivest. ''From the merchant's point of view, you probably can't do under $5 and make a profit.''

What's needed is a method that slashes the cost of the transaction. Enter Rivest, his colleague and fellow computer scientist Silvio Micali, and their new company, Peppercoin Inc., which plans to solve the problem with doses of encryption and statistics.

The service will be free to consumers, who sign up with Peppercoin and provide a credit card number. Now the user can go to any Peppercoin retailer and purchase a single, very cheap item -- an MP3 song priced at 50 cents, for instance. By clicking on a link, the music gets downloaded to the customer's computer. The merchant gets a Peppercoin -- a sort of electronic token that's got the customer's digital signature embedded in it.

What's the token worth to the merchant? It depends. Peppercoin uses an algorithm that assigns a value to the token. Actually it assigns one of two values. Either the token is worth some preset amount -- say, $10 -- or it's worth nothing at all. When the token is worthless, the merchant throws it away. When it's not, the merchant collects $10 from Peppercoin, even if the customer only spent 50 cents.

It seems utterly nutty until you apply this method to millions of 50-cent transactions every month. Maybe 5 percent of these transactions will be sent to Peppercoin, which processes them through the credit card system. The rest are thrown away. This keeps transaction costs way low. And the transactions that are processed have a value of $10 apiece, which brings in cash to make up for the 95 percent that were thrown away. Spread over millions of purchases, it all averages out.

But even if Rivest's math is correct, the success of Peppercoin is far from assured. The dot-com graveyard has a special section for companies like Digicash and Cybercent that failed to solve the micropayment puzzle.

''A payment system is a real chicken-and-egg problem,'' said Rivest. Consumers won't embrace the system unless lots of merchants accept it; merchants won't sign onto the system unless the customers are there. Peppercoin hopes to break the cycle by signing up some major media companies in time for its debut later this year.

Letting consumers buy hit music recordings for a buck or less, without charging $10 a month in subscription fees, could be just the thing to ignite the micropayment market. And if more consumers sign up for Peppercoin, more vendors will start offering products -- magazine articles, digital games, even those annoying cellphone ringtones. Many of these goodies will be items that are presently given away, because there's no efficient way to charge for them.

With Peppercoin, companies will be able to make us pay. And at the microprices made possible by his software, Rivest figures millions of us will be happy to let him throw our money away.

But what is the difference of this and PayPal???? Ok there is some more math.

But I thought part of the problem was using PayPal is that PayPal is an external service that is not as recognized as Visa, Mastercard, or American Express (plus some others).

And this service does not seem to solve that problem for me. I thought when I started reading the article that it was going to somehow have some magic receipe for using my ALREADY accepted credit card....

The dot-com graveyard has a special section for companies like Digicash and Cybercent that failed to solve the micropayment puzzle.

So what makes Ron Rivest thinks he might be able to solve this where other failed?

A key success factor of this business is trust. But unfortunaly for non-geeks, trust is hardly based on transaction security, but merely on the wealth of the company. Microsoft tokens won't have the same trust factor as Linux tokens (for example), and customers won't buy tokens that could well be worth less than nothing, if the market decides that way.

Would you really invest a penny (because that's what is's all about : invest money) in peppercoin?

What is the point of a retailer collecting these PepperCoins, then sending them in, with 5% of them being worth $10.00, and 95% of them being worthless? If you're going to have a clearing-house, why the hell wouldn't you just have the retailers collect the PepperCoins and send them in for a guaranteed 50c each, but just not do it until you've collected at least 20 of them?? It'd have the same "avoiding credit card fees" effect, but without the stupid randomness which, even if it does balance out perfectly over lots of transactions, will completely turn off the vast majority of retailers.

The consumer gets the coin. The consumer gets the suppliers ID (embedded in the web page) and gets a coin clearly marked "Pay $0.50 to Supplier (possibly)". The pay/nopay is coed inside with the suppliers private key, so that only the supplier and Peppercoin can see if it is valid.

Supplier checks if (a) a valid payment to it and (b)if and only if "a winnew", has not been used before. If so, delivers goods. If not a winner, forget transaction apart from incrmenting "expected gross" to keep Peppercoin honest. If valid, send to peppercoin for payment and note number to prevernt cheats.

This is a hard sell for all involved i think.For the Merchant
"....That's right Mr. Merchant we will allow these anonymous customers to log on to your system you give them your products, and they can pay with our tokens that are worthless 95% of the time, but you'll be ok in the long run. Um no we are not like those other dot.com companies that are not around for the long run..."

As well as that what is the advantage to the customer?
I can see how the law of averages works (or works more quickly) for the Merchant, but picture the situation that I buy one item per month for 6 or 7 months @ 50 cents a go, but due to randomness I am included in the 95% of those tokens that are thrown away. Then on the 8th month I get hit by a 10 dollar charge for something that should cost 50 cents, and even assuming I remember I have had 7 freebies, I am still out of pocket. This means I have to keeping buying, and hope that I can get 10 dollars worth of stuff, and then get out before I get hit again for another $10. This then leads to abuse/gambling, how much stuff can I get without getting charged and then get out or quit?

this looks like hidden advertising to me but i won't argue that point....

and it's based on 'patent pending technology' that is somehow acceptable by slashdotters (see here [peppercoin.com] for more info)

this sounds like a lot of marketing hype. why not just have a company that processes micropayments in mass -- if i buy 10 songs for $1.00 each from 10 record labels during 3 months i should be charged $10 as soon as it is profitable to charge me, possibly at the end of the three months, possibly after my tab is at $5.00. i think this is basically what happens with peppercoin but in a more complex, mathematically obtuse way.

finally, what's up with all the hot women on the peppercoin page? it's like i'm supposed to be able to buy them with peppercoins.

but this marketing tactic, though hardly uncommon, unsettles me in this instance. this is supposed to be a financial institution and they fill 1/3 of the screen with hip, attractive models (some are actually disgustingly skinny).

whatever, i'm sticking with my first assumption that this slashdot submission is entirely a marketing ploy and i hope everyone involved with this company gets diarrhea and their car tiers go flat on the way to pickup medicine.

"and it's based on 'patent pending technology' that is somehow acceptable by slashdotters"

Yes it is, at least to me. Not all patents are bad; I am fine with the technological details (the encryption algorithm, process for randomness, etc) being patented. Ie. if you want to do a similar thing using different algorithms, you'd be allowed to.

It would be another matter if they'd patent the idea of Micropayments.

but seriously, i don't agree with the current implementation of patents. they were intended to give a small inventor time to get a product to market but now they are just used to create a legal monopoly. i'd be more down with patents if they brought the finincial size of the applicant into question and set the length of the patent according to the amount of time expected for getting the product to market.

but i think what you are 'fine with' is the place for copyright which i have less of a problem with. copyrighting an algorithm is better. without seeing this patent (i checked uspto.gov, couldn't find it) i can't say how ridiculous it is. if it's like 'we patent micropayments based on amassing charges then charging credit cards en mass' i'm going to be pissed.

and my sig is only slightly tounge in cheek -- i don't believe in god.

That's only a problem if you are a retailer. If so, you should (in theory) be selling enough that the fluctuations are small. And it really makes no sense to commit fraud by taking a (say) 1.0001% transaction charge instead of the agreed 1%.

Seriously, there are protocols for coin tossing etc such that you don't actually have to rely on trust and neither party can cheat. A quick description:- Alice sends the encrypted result of a coin toss- Bob sends the answer they're hoping for encrypted- Alice sends Bob the key that was used to encrypt the toss result. Bob sends the key that was used to encrypt his bet.(note: both messages are send with some kind of pre-agreed nonce)

I make an assortment of purchases.. PepperCoin keeps an account with me and pings my CC with the total aggregate sum of my purchases through them on a monthly basis.. therefore my CC is not littered with 5 cents here, 17 cents there, etc. Basically, I see a charge of 78.13 (example). Ok, if I wanted to see what that 78.13 was for, I might log onto my account at PepperCoin and see the exact breakdown to the penny.

Okay.. from the merchant's side.. he does not wanna mess with trying to account for a 5 cent sale.. so lets calculate the a 0.005 probability ( thats 5 cents out of 10 dollars ) and assign that probability to a ten dollar token, that the token is any good. So, in effect, the merchant is gambling he is going to get paid - in this case, for the sum of 5 cents, he accepts a 0.005 probability he gets $10. Basically, its just like gambling, where PepperCoin is the "house". But over millions of transactions, statistics would approximate the same return to the merchant as if he tallied all the micropayments.. but the merchant does not have to worry with millions of tiny payments, he works with thousands of larger consistent payments. And is willing to accept the accounting simplicity as tradeoff against any probability error, as well as the overhead of the "house cut". This technique allows the processing of billions of payments without keeping detailed records on each... the only thing going through is the statistical averages of who gets paid what.

Well anyway, thats my *understanding* of how this thing works...

One neat thing is that it appears any identifying information to the purchaser would be lost in the "noise".
comments invited.

I make an assortment of purchases.. PepperCoin keeps an account with me and pings my CC with the total aggregate sum of my purchases through them on a monthly basis.. therefore my CC is not littered with 5 cents here, 17 cents there, etc. Basically, I see a charge of 78.13 (example).

This sounds pretty risky to Peppercoin. What if a large number of customers sign up and then only spend 5 or 10 cents in a month? Then Peppercoin will have to pay huge amounts more in credit card fees than they take in.

I think they'll have to do it by setting up prepaid accounts for customers, or by allowing customers to participate in the payment gambling scheme.

If each individual merchant accumulated credit to occasional payoffs, there would be too much overhead, and no reliable guarantee that the charges would ever be large enough to be worth reconciling.

The biggest problem is of merchants who don't have enough content to have a chance for any one consumer to spend enough for the transaction to be worthwhile. Suppose me & 2 friends play a song and sell it as MP3 for $0.35. If it's a nice tune, we might get a few thousand people willing to pay per month. But if each only spends $1, we can't aggregate enough to profitably collect from their credit cards. But, since those consumers are probably also purchasing many other small data items online, Peppercoin.com can wait and aggregate them into reasonable chunks.

A related benefit is that Peppercoin (or some other, centralized micropayments service) will reduce the sign-up overhead for accessing paid-content. Today paid content is very rare- not just because you've got to be billed a lot (to cover ccard fees), but also because the time it takes for a potential user to sign up for the first use of the service.

By the time a customer has input credit card and billing info, created & memorized a password, and decided if the merchant is trustworthy or not, he's probably lost interest in whatever drew him there, or is ready to search for a free alternative (even if it's not quite as good).

If a user could follow a random link from a weblog and see a promise of amusing content for $0.25, there's a fair chance he'll pay it, as long as only 2-3 mouse clicks are needed.

(Yes, this does open the door to some scams- mislabelling my junk files as something valuable or entertaining. But there are technological approaches to make them less likely- distributed reputation servers and similar)

I have only read it quickly, but there seems to be no mention of the way PepperCoin will charge the customers. Since the PepperCoins' value is transferred from PepperCoin to the merchant and this transaction is "optimized", the other transaction (PepperCoin <=> customer) is important. It seems to me that this would only(?) work with a pre-paid amount (otherwise the customer would have to purchase frequently enough to be charged for several transactions at once), so the claim from the article: Letting consumers buy hit music recordings for a buck or less, without charging $10 a month in subscription fees, could be just the thing to ignite the micropayment market. is questionable.

I don't understand it either... I think the article is misleading. On the Peppercoin website it says they don't rely on aggregation i.e. no upfront $10 fee. If that's the case then the only way I can see this system working is if it is in fact symmetric and both the customer only pays $10 some of the time and the retailer only recieves $10 some of the time.

the problem with any kind of online payments, at all, is that people living on countries other than the site's country (believe or not, the majority of the world population is not unitedstadian) are often in trouble to pay at all.

credit cards pose a secutiry risk (both for in-country and foreigners), independent of how good encryption is, there is always the human factor on the other side. The moment you give the card number, independent of the buy being $ 0.50 or $ 500, you are at risk. The micro-ness of the values only bring more risk of security look-overs.

If that's not enough, international credit cards are not easily available to everyone, especially young, income-less students, who are a considerable part of the "people who use the net" and are likely to be the main targets of such "content producers".

International bill sending poses more issues than any merchant is willing to face.

The only way for this to work is if a multi-national company sets up a station on every target country (US, Canada, all over Europe, probably South America and some places in Asia too, for most businesses) for selling net credit. Of course this company will be a monopoly, which isn't good; Moreover, politicians would come up with lovely absurd taxes on such services (allowing citizens to mess freely with the external debt is a bad idea, anyway), and the micro-payments would no longer be micro.

It may work for small segments and businesses, which is enough to get this yet-another-dot-com in the blue, but micro-payments aren't taking over the "content industry".

credit cards pose a secutiry risk (both for in-country and foreigners), independent of how good encryption is, there is always the human factor on the other side.

No. You don't need to give your credit card number in a micropayment system. There are perfectly good (in one sense) micropayment systems in use today - premium rate phone lines. If I really wanted to I could use a contract-free prepayed phone, and not give *anyone* my card details.

What about the retailer that doesn't do a heavy volume of business through PepperCoin?

For example, if it's a 50/50 probability that a given coin is worth High or Low and you flip that coin 100,000 times, then within a minimal error, the coin will be 50,000 High/50,000 Low. But what about a retailer that only does 1000 or 500 or *less* per month.

Then, add on the fact that the PepperCoins being discussed aren't necessarily 50/50 but sound more like 5/95 or 1/99. If you closely examine any 500 of those 100,000 tosses earlier, you can probably find quite a few runs of 500 lows or more in a row. Suddenly, there are whole months that a retailer is going without payment to wait for that one time when they get compensated waaaay down the line. It seems a feast-or-famine proposal for the smaller retailer.

Let's say you're a firm hoping to make $10,000 in sales in the next month, corresponding to 20,000 Peppercoins. Each peppercoin corresponds to a random variable which is $10 with probability 0.05

Your expected income is in fact $10000 while your standard deviation is 10(20000*.05*.95)^(1/2)=$308 or so. So while the variation is painful, it actually turns out you'll be in the $9000-$11000 range 99% of the time.

Similarly, if you scale down by a factor of 10, so you have 2,000 coins. Your expected income is $1000 while the S.D. is 10(2000*.05*.95)^(1/2)=about $100 or so. The 95% range here would be from $800-$1200, which is more painful but still managable.

The odds of a run of 500 lows in a row is about 7.27*10^-12, safely ignorable

Your expected income is in fact $10000 while your standard deviation is 10(20000*.05*.95)^(1/2)=$308 or so. So while the variation is painful, it actually turns out you'll be in the $9000-$11000 range 99% of the time.

You're assuming the tokens are valued independently of each other. If the vendor saves up the tokens, there's no reason Peppercoin couldn't choose to aggregate them, and reduce the variability even further.

The innovation of Peppercoin is that it doesn't *require* aggregation in order to reduce the transaction fees.

If statistics like that didn't work, the insurance industy wouldn't exist. You said "any 500 of those 100,000 tosses earlier". No. The probability of 500 in a row is 0.95^500, which is vanishingly small. Electoral posters reckon that slightly over 1000 truly random questionees yield a standard deviation of 1% in the result - which is good enough for commercial purposes. So you need to sell more than 1000 things ($500 worth) to get very close to your "honest" result (and you are as likely to win as to lose that 1%). It is going to cost youe more than $500 to set up yur web page, delivery system, Peppercoing account, advertising so people know of you....

The only way I can see this working is if Peppercoin aggrigates all of a customer's purchases into a single credit card transaction after it reaches a certain break-even point.

Only a certain number of customers will reach this break-even in a given time-period.

The value of a "winning" Peppercoin to a merchant would be this break-even amount, minus the credit card company fees and Peppercoin fees.

The odds of a merchant getting a valid Peppercoin
would be based upon the number of break-even transactions made in say, a month.

If 10,000 total transactions were made in the first month, and only 100 people spent more than the break-even amount, say $12.50, the odds of a given coin being worth $10 would be 1/100.

It's a novel system, as previous efforts to deliver microcash required customers to buy tokens in advance. This system places the risk upon the merchants, who are being asked to gamble that people will use Peppercoins on a regular basis.

Technically knowledgeable people are usually terrible at marketing. The Peppercoin web site is one of those "Click here to get the plug-in" web sites. (Last time there was a big security vulnerability in Flash, I uninstalled it from Mozilla.)

A play on words like "Peppercoin" is rarely successful marketing. People want to be able to trust a company. They don't want a small joke.

Peppercoin accounts are backed by a bank account, usually via a credit or charge card.

That is the death knell. Any system that interfaces to credit cards or bank accounts but which doesnt have some utterly compelling extra feature is going to fail, especially when there are services like PayPal already dominating the market.

Any point of friction, like having to sign up for a bank account to spend money will instantly limit the uptake. Merchants will become disenchanted with the lack of customers, and stop converting their content to peppercorn files.

If opening an account is not a three field form, then forget it. This is the true problem of micropayments; how to give away the user accounts to create a huge spending population.

But Telecom companies already charge tiny amounts for services, they have the structure in place to do so... I get charged a minimum of UKP0.05 for every phone call I make.

So all we need is for the seller to charge the telco handling your Internet Connection (dial-up, cable modem, ADSL whatever).

So for example, I log online with BT and surf to mp3.com. I ask for a $0.25 MP3 file and mp3.com checks my IP, spots I'm at BT and asks for the cash FROM THEM, NOT ME. (Insert foolproof authentication here, of course).

When I get my next monthly bill, I have an additional $0.25 charge on it, hopefully with some information regarding what it's for. I pay my bill as usual (relatively large numbers so it's easy).

Assuming BT and mp3.com trust each other, they can agree to settle the bill for all BT's customers when it hits $10, $100 or $10,000 if they like. Or BT can pre-purchase 'tokens' from mp3.com and use them up as and when their customers buy stuff.

Sounds exactly like PayPal, doesn't it? Except I trust my telco not to rip me off, I don't (usually) need to pre-charge my account, and the economies of scale mean it's easier to kick off - there are a huge number of customers for the average ISP, so they can all start trying this out without stuffing $10 in a Papercoin or PayPal account, which might be usable in all of 3 online shops.

For the user, sign up for a PepperCoin account, providing your credit card number, and when you want to make a purchase:

Open the PepperPanel.

Create a token for the amount of the purchase (i.e. $0.50.)

Provide the merchant with the token.

The token is a digitally signed token with the merchants "name," the consumer's "name," the amount of the transaction, and a value of either $0 or $10 (to the merchant.) Your PepperCoin account is charged $0.50.

The merchant, upon receiving a token, sends you the product, and if the token is worth $10, keeps it for later.

At the end of the [day / week / month / quarter] send all the $10 tokens to PepperCoin. PepperCoin sends back the money for the total value of the tokens. What you'll find is that (money received) / (total number of tokens collected) is $0.50. The merchant will be charged a fee for the service, so you might see something like $0.45 per purchase (10% fee.)

Back to the consumer... over time you'll accumulate $10 or more in purchases at which point your credit card will be charged. If, let's say, 6 months elapse, and you still haven't accumulated $10, you'll be charged your current balance.

See... PepperCoin makes about 10% of all the purchases minus the cost of credit card transactions to the consumers (about 5%), the merchant gets $0.45 instead of $0.20 on a $0.50 purchase, and the consumer is charged dollar-for-dollar what they spent.

The reason credit card companies charge a minimum fee per transaction is because it isn't really worth it for them to charge less.

Let's say you were handing transactions like a credit card company does and charging a flat 5% per transaction. What you'd find is that you make all your money on the large number of middle transactions ($10-$100, say) and also on the small number of large ones (over $1,000.) Given that your network has a finite amount of space, you'd favor the transactions that make the most money. However, instead of denying transactions below $10 because they don't make money, you just charge a flat fee of $0.25 on every transaction which makes it worth your while--no transaction ever nets less than 5% of $5. You're happy because it's just like you're getting no transactions under $5 and the merchant is happy because they can charge $4.90 if they wanted.

However, from a merchant standpoint you really get screwed when things get down to $0.25--the transaction fee is 100%. What if you could sell stuff right down to a fraction of a penny and still only pay a 10% fee?

PepperCoin is just like a credit card company, in a way, in that they don't want their network plugged with a million $0.001 transactions, but instead of making an effective minimum charge, merchants buy in bulk. However, they can't be a credit card company because the Internet-based transaction of passing a PepperCoin token around is much orders of magnitude cheaper than the telephone-based system used by credit cards today--why would you want a PepperCoin credit card if you _couldn't_ use it in brick-and-mortar stores? In other words, the existing credit card infrastructure wouldn't support this kind of system because the data transfer costs are too high.

How is this better than the coin actually being worth 50c and the merchant sending all the coins with their real values to Peppercoin at the end of the [day / month /...]

The number of coins that someone (Peppercoin) has to remember to stop the same coint fraudlently being submitted twice. With your scheme, every coin, no matter how small (and I see 50c as large for micropayments) has to be recorded. With Peppercoin, only paying tokens, by definition worth at least $10, need to be remembered.

... it's the credit card company charging so much per transaction. Why work around that problem?

The "market" for credit cards is skewed because the transaction charge is applied to the merchant rather than the purchaser. If the charge did come direct from the purchaser, the purchaser would choose a credit card that offered the lowest charge. As it is, the merchant has no choice (other than saying "I don't accept Amex), so competitive pressures don't apply.

Peppercoin-type operations will further mask the skewed market - we will all end up worse off; except of course for the Visas and MasterCards of this world.

Or, maybe, by providing competition in the "low-per-payment fee" category, they'll inspire the Credit Cards to change how they work.

Scenario A: Peppercoin.com becomes moderately successful, and has a few clones/competitors spring up. Then Visa and Mastercard buy them all out, and start offering micropayments as part of their normal services.

Scenario B: Peppercoin.com is successful, and begins accepting bank checks (instead of ccard payments) to reconcile your monthly bill. Eventually some customers start using Peppercoin for even large transactions, and don't bother with credit-cards anymore. Visa and Mastercard are forced to adapt.

Reading all the comments so far, I get the impression that people are forgetting the likely target "merchant" audience for PepperCoin. The article is probably somewhat to blame for this, since it hints at online music downloads being the "killer app" for micropayment technology. 50 cents is a downright macropayment compared to what this system was designed for. I am thinking bigger, much bigger.

My guess is this system was likely not designed for use by run-of-the-mill merchants with transaction volume below the millions (and conceivably billions). Like many have pointed out, your typical store merchant would laugh at the prospect of roulette-based revenue.

This system was designed to solve the problem of handling billing and payment collection for A LOT of transactions per unit time. Think NASDAQ. Think VisaNet. Think McDonald's-years. Think pay per wireless packet, a concept routinely floated by Rivest's MIT colleagues including Dr. David Clark [chiefexecutive.net].

Coupled with a computationally efficient token verification scheme, I could see how this system could turn standard billing practice/procedures on its head, provided the big corporations have enough smart people in their stables to say, "Rivest is right." For instance, if my statistics memory serves, this system should effectively enable stepless billing (without increments or round-off issues) - in other words, finest-grain discrete-time pro-rating for services provided, tunable per application to some arbitrary epsilon.

I think music downloads are a red herring. It's entirely possible that PepperCoin will never see the light of day as a consumer payment service. But I'm very curious to see what the world's largest accounts receivable departments have to say about it.

I remember back in the day when a certain OS used random to decide which thread got to run. That scheduler was based on similar logic to peppercoin's: It will all even out on the large scale. The problem was, some things required it to even out on the small scale and some important services were starving every once in a while (maybe days) and taking the system down.

Also, the article fails to explain why the payments are done randomly. And how the 'random' token is chosen. Without some rational and more precise information, this idea is nutty.

E-gold [e-gold.com] or Goldmoney [goldmoney.com] are payment systems based on transfers of ownership of real physical gold, denominated by mass. Goldmoney scales down to 0.001g (which is worth just over one US cent at todays wartime-high gold prices) and all the way up to infinity. E-gold scales up likewise to infinity and down further (to about 4/100 of a cent at todays prices), and has an e-silver version if you want to go yet smaller.

How about a PIN-protected mechanism similar to a debit-card which allows you to use your phone number to make a purchase? Thats what a 1-900 number is, in essence, anyway.

I know, I know, security concerns. But if a phone company supports this scheme, it doesn't have to be your real phone number, or even a valid phone number. It could be some random number that's associated with your phone number in the phone company's database. The cellphone companies ought to go crazy with this -- it opens up a LOT of options for internet-enables cellphones, esp. when you add bluetooth to the mix.

Okay, the PIN idea sucks for the internet. But hey, there's gotta be a solution there, too. I know of a few, but there's no room in the margin...

I see a big marketing problem. If so many allegedly intelligent people on/. can misunderstand the system, how the hell are you going to sell it to Joe Public? And Peppercoin's website is useless on this - it sounds like every other snakeoil.com out there.

Why not just randomize *all* payments for a particular supplier? Either they get paid by Peppercoin that month, or not. Better yet, Peppercoin can randomize their entire set of payments. Either: "Hooray! Peppercoin paid all its bills this year!" or "Sorry. We went bankrupt."

Looking over the peppercoin scheme, it appears that Rivest
is hoping to overcome the transaction fee by inducing the
purchasers to gamble a bit.

Every time you "buy" something, you take a chance
on paying some pre-set minimal fee (looks like [US]$10.00).
If all you buy is $0.50 items, your chance will be 5% each
time you buy. In the long run, it should even out...

BUT...

Realistically, Rivest is making a very conceited assumption;
that everyone will be using his micropayment service.
The more services, the harder it is to hit that "long run"
point where everything evens out. And guess what?

Banking systems ALWAYS err to the benefit
of the bank. (Surprise!) They will never allow
themselves to come up short. The most likely implementation
will bill you the very first time you use it and then
give you the random chance.

So, how many Rivest-ish micropayment services would you
give your credit card info to? (Did he think he was the only
one who could do it?)...and how much opportunity do you think
this provides for credit fraud, since you never really
know whether you should have been charged
or not.

HOW 'BOUT A SERVICE THAT JUST ADDS UP MICROPAYMENTS
AND BILLS YOU WHEN THEY HIT A LIMIT LIKE $10.00?
Does anyone remember "NetCash"? They could even ask you to
pay the first $10 in advance once they were popular enough.
PayPal is already in a good position to implement this...
but they don't.

Chances are they've looked into it and figured it wasn't
going to be profitable.

Explain to me, o banks, why it costs you $2 to give me money from my own accout? Why it costs you $10 to wire transfer some money from one account to the other? Why it costs $1 to give me a balance statement? Why it's 75c to use your ATM card at anywhere but a supermarket? These are just the costs for consumer-visible transactions; the costs of using a credit card or ATM to the business owner must be similarly padded.

These are database transactions. They happen almost instantly and they consume resources at a tiny fraction of the cost we're being charged. It's electricity being sent over a wire; the marginal cost is so close to zero you need calculus to describe it. This is why micropayments don't work yet, and elaborate schemes like this randomization are even necessary at all. PayPal and similar systems have eliminated these costs, but "real" banks refuse to, because they make an assload of money off of charging for the movement of electrons.

There are issues of user approval that need to be solved to get this working and Peppercoin (man what a lousy name) is not even close to any of them.I'm not gonna waste your time with my words since Clay already wrote about it in The Case Against Micropayments [openp2p.com]

The main problem is that users hate micropayments:

"Why does it matter that users hate micropayments? Because users are the ones with the money, and micropayments do not take user preferences into account.In particular, users want predictable and simple pricing. Micropayments, meanwhile, waste the users' mental effort in order to conserve cheap resources, by creating many tiny, unpredictable transactions. Micropayments thus create in the mind of the user both anxiety and confusion, characteristics that users have not heretofore been known to actively seek out."

Go ahead and read the article. It explains the problem in better detail and it clearly shows why the problem is conceptual and not technical. Then you can happily get on with your life, without Peppercoin and without micropayments. Cheers.

So we have *drum roll* another internet currency! Hoorah, the old ones did so well. Noone has the funds to get to critical mass now - you need a LOT of vendors to accept the currency for consumers to be interested. Not that VISA/MC would just sit there if you tried to get to this level.

I understand the idea of using statistics to reduce the number of transactions with the same results, but I don't understand how Peppercoin makes up the difference. A credit card still needs to be billed in the end, right?

Peppercoin will not pay the merchants 100% of the money that they took from customers.

It will pay out 100% minus the fee for the real transaction costs minus a win margin for them.

The benefit is, that if e.g. only 5% of the transactions will result in a credit card fee, this scheme gives a 95% cost reduction in real transfer fees - a big big improvement.
Ok, the merchant needs many transactions to get reasonable statistical error margins.
But like with insurances on could imagine different peppercoin fees for different risk levels.

The scheme is elegant, but it makes peppercoin a mix of a bank and a lottery, areas typically keen defended by state monopolies. So guess it will be more a legal/political issue than a technical/economic one.

That would work if pepercoin paid the merchants by credit card somehow and that was the fee. But its not. The fee is, always has been, will be and just plain IS on the purchaser problem..50 ==.50 no matter what you do.

As far as I understand there are two types of credit card transactions involved:

The first one is where the merchant claims his peppercoin win from peppercoin.

The second one is, when a client orders peppercoins (both winners and loosers) from peppercoin.

The scheme makes only sense, when many transactions are condensed to one transaction.

at the merchant side, this is done by increasing the value, thus a winning peppercoin is not.05 cent but 10$, 20 times the value.

at the client side, the number of coins is increased, the client buys 20 peppercoins at.05 cent for a total of 10$, for this he will get some electronic list with 20 transactions numbers or similiar, the peppercoin software knows which one is a looser, which one is a winner, the client doesn't

The rest is done by probability. The client buys 20 times, but only one winning coin will be distributed.
So we have 20 transactions and 2 credit card billings (one at the client, one at the merchant). That reduces billing cost 10 to 1, thus a saving of 90%. Not bad.

I have to correct myself. According to the FAQ the accumulation at the client side is not done as I expected. They will bill only afterwards,

That gives for 20 transactions a total of 1 credit card blling over at the merchant plus between 1 (client does 20 transactions in one month, client is billed monthly) and 20 transactons (client does one transaction per month, is billed monthly).

So it would depend on the billing intervall and how many transactions a client does per month.

Digital tokens can be seamlessly copied. So the company that is going to deliver cash (Peppercoing) must keep track of every valid token it has issued (withing a time window that has to be months at least), so that the same token cannot be issued twice.

If tokens are worth $0.01 each, you have a *huge* heap of tokens which has to be tracked. But bu this scheme, worthless tokens can be dumped. Every valid token is worth at least $10. If Peppercoin is taking (say) 1%, they have %0.10 to pay for the cost of storing and revalidating the token. If volume grows because people used it for really micro payments, other schemes crumple under the strain: Peppercoin doesn't. They get a straight $0.10 per transaction.

Obviously, there must be some micropayment below which even they can't be bothered - the cost of issueing a token is probly more than $0.00001. But it lowers the per-transaction break-even point by an order of magnitude or so.

To answer a point further up - yes, the purchaser needs an account with Peppercoin. But people are probably happier with that: pay in fixed amount, thus limiting losses, and monitor it in real time on the web. Pay a $0.50 peppercoin , see your account drop by $0.50. No waiting for the bill to come in, never risking more than you paid in - Joe Sixpack is happy.

But the term lottery is very good in this context.
Let's look at the scheme from that point:

If a state organizes a lottery (at least here in Germany) it is obliged to pay out at least 50% of the money that came in from selling the lottery tickets.
This payment occurs in the same random fashion like the pepper coins.

In reverse, a customer of a lottery can roughly except to win back about 50% percent of what he shells out (it depends on the time frame and how all the win money is distributed among different winning ranks).

The same holds for the merchants participating in that peppercoin scheme. Statistics is on their side. The more transactions, the smaller the error margins.

I would call the scheme a reverse lottery.

The critical point is of course the tuning of the propabilities in the win/loss one time pads that Rivest's company is likely to distribute to the client software.
He can make money by having to low win probabilities.

As a participating merchant I would perhaps insist on a contractual margin - if I have N zillion transactions there should be guarantieed error margin. If my pepper coins are below that margin, I should get compensated by Rivests company, if I'm above I should pay back.

The general idea, to use statistics to neglect expensive detail, seems very good to me.

The impression I get is that this is effectively PayPal. The user loads, say, $10 into their account via a credit card. Pepper coin then pay the transaction fee (maybe $.25 or something).

Then basically Pepercoin, I assume, keeps a tally of how many items a given site sells. On every N-th transaction, they hand over $N to the retailer. This way the retailer only effectively needs to pay the $.25 (+ Pepercoin's markup of course) per 20 transactions of whatever.

So, to sum up, this seems basically like Paypal but reworded. You still can't use your credit card to make micropayments and you still need to have an account with Pepercoin, and for the retailer to accept Pepercoin, before you can make a transaction.

Unless I'm missing something this seems pretty useless. I thought the major factor with services with Paypal etc. was that users don't want to have to sign up with a 3rd party - it's just too much hassel.

It seems to me that it is an optimized PayPal. I mean "merchant-side" optimized (they can "group" micropayments to save on transaction fee).

"I thought the major factor with services with Paypal etc. was that users don't want to have to sign up with a 3rd party - it's just too much hassel."
You are already dealing with a 3rd party.. the Credit Card company; only you don't notice 95% of
the times.

If Peppercoin succeeds in making themselves perceived as "transparent" to users, they could be succesful. Anyway, I guess that if micropayments becomes a rich business, Credit Cards companies will take the business in their hands.

After reviewing the FAQs on the Peppercoin site, it appears that the consumer will always be charged the 50 cents -- never the '$10'.

From what I can tell, what Peppercoin does is batch the transactions so that the total of all of them goes into *their* merchant account. I couldn't find out any info on how often they would distribute the funds to member merchants, but I'm sure the frequency of payments (triggered by number of total transactions or dollar amount) would be tied to merchant membership fees.

The way I read it is that they do have to process every coin, but only some of them turn out to be worth something.I can't see that it is more efficient than the way some internet charging works (i.e keep storing up the amounts until its worth incurring a transaction charge to pay out.)

Of course this can work. Just like paypalCustomer creates and account and puts in a minimum amount via credit card. The card is charged. Just like paypal.The only difference is how the money is paid to the merchant; random digital peppercorns.